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British Banks Determined to Bankrupt Britain

Economics / UK Debt Jun 25, 2010 - 10:22 AM GMT

By: Nadeem_Walayat

Economics

Best Financial Markets Analysis ArticleThe Bank of England has raised concerns over British banks exposure to European sovereign debt in its Financial Stability Report, calling on the banks to raise capital reserves in advance of future debt defaults, and to extend the maturity of the banking sectors wholesale funding as short-term loans increase the risks of credit freeze events as they are rolled over.


From Subprime America to Subprime Europe, the only thing that British banks appear to know how to do well is in how to pocket bonuses on the basis of fictitious short-term profits that are destined to leave the tax payers to pick up the debt default prevention bill.

For instance Lloyds TSB, the tax payer bailed out bank to the tune of hard cash of £150 billion expects to refinance £400 billion of short-term debt during the next 12 months much of which is linked via French and German banks to the high risk of default PIGS.

The other banks also collectively have some £400 billion that requires re-financing with similar exposure sideways to PIGS as they sought higher yields, so if French and German banks suffer then so will British banks.

The below graph was last updated over a year ago which illustrated the total liabilities of £4.7 trillion by 2013-14, which despite George Osbourne's emergency deficit cutting budget as a consequence of the latest projections for public sector pensions and european debt default risks, total liabilities look set to be yet higher. All of this is a sitting time bomb that will explode in the government bond markets as illustrated in the Inflation Mega-trend Ebook. The trigger for which could be European debt defaults, regardless of Britain's own programme for deficit reduction which does nothing to actually halt accumulation of new debt and liabilities.

The one thing that is absolutely certain is that many if not all of the European PIGS WILL eventually default on their debts as it is impossible for countries such as Greece to service its huge and growing debt mountain, the E.U. solution is to INCREASE Greece's debt burden by approx another 30% of GDP. Therefore Greece will remain stuck in an INFLATIONARY depression as it is FORCED to import inflation whilst at the same time its economy stagnates in nominal terms and deflates in real terms. In the meantime the credit markets will remain closed to Greece and increasingly to the other PIIGS.

Greece Will Go Bankrupt Due to the Debt Interest Spiral

Greece public government debt stands at over $300 billion, on which it currently pays 5% interest (market interest rates have surged far higher), which amounts to a debt interest burden on the Greek economy to the tune $15 billion per year which is set against the Greek economy of $300 billion (and shrinking) and Greek government revenues of about $115 billion. Therefore the Greek government is currently forced to pay about 10% of its annual revenues as interest on debt per year which it cannot afford to do i.e. the Government is running a budget deficit of 12% of GDP. It is about 25% short of revenues against what it spends. What this means is that the debt interest is being financed by NEW debt that is continuously added to the Greek debt mountain and there in lines the debt interest spiral, as the greater the total debt the greater the interest the country has to pay which results in even greater debt and thus greater interest payments due each year.

However throw into the debt spiral the fact that bond investors are 'usually' not stupid, they are not going to wait around for a country to go bankrupt, they will demand a higher interest rate to hold the riskier Greek debt which means instead of paying 5% interest, suddenly the annual debt interest burden jumps far higher as we are witnessing in the crash of the Greek bond market, which results in a further escalation of the debt interest spiral, and as the risk ratchets up so does the interest rate demanded by the market to continue to hold Greek debt until eventually the Greek government gives up and defaults on the debt as there is no way it can finance the deficit as a function of the burden of servicing the annual debt interest.

The Euro bailouts of Greece is not going to stop Greece form going bankrupt as at the end of the day the bailout is just a loan at 5% interest i.e. more debt to pile on top of existing debt that Greece cannot service, the same applies to all of the other PIGS which have been lining up one after another for never ending total debt mountain increasing bailouts.

Therefore the 'paper' losses that British banks are sitting up on WILL materialise into real losses, how much ? There is talk of between 30% and 70% loss. That's bad debt write offs of between £90 and £210 billion, which compares against George Osbourne's emergency budget that sought to extract £40 billion of pain from the UK economy to pay down the annual deficit of £156 billion, which illustrates why the banks are so dangerous to the UK economy with total liabilities of £5 trillion which is more than enough to bankrupt Britain several times over.

These out of control weapons of mass financial destruction need to be broken up. Not wishy washy regulation but REAL regulation. In this respect the new coalition government has announced its intention to abolish the inept, incompetent and culpable Financial Services Agency (FSA), that at the very least sat and twiddled its thumbs whilst the banking system imploded and at its worst was directly culpable by deliberately ignoring the red warning signs emanating out of the banking sector since at least 2006 as a consequence of the revolving door that exists where bankers went from the banking sector into the FSA and then back out to the banking sector which ensured that the FSA operated more in terms of what's best for the banks to maximise profits and not in the interests of what's best for Britain as I have voiced many times over the past few years -

Bankrupt Britain's Debt Credit Ratings Crash - May 21st 2009

Firstly REAL REGULATION ! I am talking truly independent regulation along the lines of the courts system, none of this back slapping insiders on the boards of the likes of the FSA, who is in charge of the FSA ? Adair Turner former Vice chairman of Merrill Lynch, that's right a BANKING INSIDER in charge of the regulator. Even if Adair Turner understands the truth of how the bankers run the country, which he probably does, he will never point the finger at his banking buddies and institute changes that take power away from the banks and put it into the hands of those that the British people have actually elected to run the country. The prime requirement should be that the regulator is headed by NONE BANKERS.

Fourthly, an Independent regulator MUST BE COMPETANT ! The FSA DOES NOT HAVE A CLUE OF WHAT IT IS DOING either by Choice or Design. IT IS INCOMPETANT AND SHOULD BE ABOLISHED and start from scratch. The sole responsibility of regulating the banks should be with an independent and restructured Bank of England, most of the current board should be dismissed, as i wrote a 9 months ago, the MPC committee at the monthly meetings apparently instead of acting sat sipping tea and talked about the weather.

The Bank of England has now been made solely responsible for regulating the financial system, which I am not sure is such a wise move as the BOE itself predominantly exists for the best interests of the banks. The only way the banking sector can be effectively regulated is if non bankers are put in charge of regulation i.e. there is direct parliamentary oversight over Britain's banking sector as the risks it poses to the economy are far too great to trust bankster's to be in charge of who have shown that they are willing to literally sacrifice the whole country so as to ensure they do not personally lose a single penny, and that many politicians pander towards as they await appointments to bank boards on leaving political office, as evidenced by the £2 billion annual levy against the £200 billion the Bank of England has parked onto the banks balance sheets by means of Q.E. which is set against £111 billion that the rest of the population will have cough up annually to effectively pay for the bankster's crimes.

Comments and Source:

By Nadeem Walayat

http://www.marketoracle.co.uk

Copyright © 2005-10 Marketoracle.co.uk (Market Oracle Ltd). All rights reserved.

Nadeem Walayat has over 20 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem's forward looking analysis specialises on UK inflation, economy, interest rates and the housing market and he is the author of the NEW Inflation Mega-Trend ebook that can be downloaded for Free. Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 500 experienced analysts on a range of views of the probable direction of the financial markets. Thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.

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Comments

Jas Singh
27 Jun 10, 17:08
Unfunded Pension Liabilities

Nadeem

What exactly is Unfunded Pension Liabilities? Is this basic citizen state pension liabilities? Or state workers pension liabilities?


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